Author: ENERGY ANALYTICS INSTITUTE (EAI)

(Foreign Policy, Lisa Viscidi, .16.Oct.2018) — A potential return to resource nationalism could set both countries back.

Until this year, resource nationalism—when a government asserts its control over a country’s natural resources—seemed to be on the wane in Latin America. With oil prices low, state oil companies were struggling, and market-friendly governments had started opening their energy industries to private investment.

In the coming months, though, the region’s two largest economies may both have new leaders who came to power on promises of a return to the old days. In Mexico, President-elect Andrés Manuel López Obrador’s vow to restore Mexico’s state energy companies to their glory days and his emphasis on energy independence from the United States were central to his campaign. Similarly, Brazilian presidential candidate Fernando Haddad (who is polling well behind his rival, Jair Bolsonaro, but could still eke out a win later this month) wants to reassert state oil and power companies’ dominant positions in Brazilian energy markets. Both López Obrador and Haddad have argued that the current Mexican and Brazilian governments, in trying to open energy sectors to private investment, have effectively handed over state assets to foreign companies.

This is not the first time Latin American countries have flip-flopped on resource nationalism. The idea was initially championed in the 1950s and ’60s by Juan Pablo Pérez Alfonzo, the Venezuelan oil minister who helped found OPEC, and Getúlio Vargas, the Brazilian president who created the state oil company Petrobras in 1953. The slogan he gave it: “O petróleo é nosso,” or “The oil is ours.”

In the 1990s, historically low oil prices pushed Latin America’s energy sectors toward privatization. Petrobras shares were floated on the São Paulo and New York stock exchanges. Argentina’s state oil company, YPF, was sold off to private investors entirely. Then, in the early 2000s, as oil prices rose again, governments across the region began expropriating energy assets. A wave of recent reforms, again tied to low prices, encouraged private investment once more. In Mexico and Brazil, however, these reforms were never popular. And so, in both countries, the idea of energy sovereignty, part of a broader economic nationalist and protectionist approach, is again taking root.

For his part, López Obrador has long criticized the energy reform that the current president, Enrique Peña Nieto, signed into law in December 2013. That reform revised the constitution to open the oil and power sectors to greater private investment, creating competition for state monopolies. As a presidential candidate, López Obrador condemned the opening as putting the country’s riches into foreign rather than Mexican hands. Now, he wants to strengthen the state oil company, Pemex. He has vowed to increase Pemex’s investment budget to boost oil production, which has plummeted to 1.8 million barrels per day from a peak of 3.4 million barrels per day in 2004. His goal of 2.6 million barrels per day by the end of his term in 2024 is ambitious.

In order to end imports of gasoline from the United States by 2022, another of the president-elect’s goals, López Obrador plans to build a new refinery in his home state of Tabasco and upgrade six existing refineries, which would add over 1 million barrels per day in output if all existing refineries ran at full capacity. Mexico produces mostly heavy crude oil, much of which it ships to the United States for refining. It then imports about 1.3 million barrels per day of refined products back from the United States for domestic consumption. At the same time, López Obrador has promised Mexican voters a decrease in gasoline prices. The Peña Nieto government had cut gasoline subsidies just as international oil prices started to rise again, causing a 20 percent bump in fuel prices.

In the power sector, López Obrador plans to strengthen the state utility company and expand hydroelectric capacity in Mexico to slash imports of natural gas. In recent years, Mexico has become a critical market for U.S. shale gas as the pipeline infrastructure between the two countries has been beefed up. Cheap U.S. natural gas has also lowered the cost of electricity generation in Mexico, so tapering off the imports could hurt on both sides of the border.

In Brazil, the polarizing right-wing candidate Bolsonaro, who won 46 percent of the vote in the country’s first-round presidential election on Oct. 7, will face Haddad, a left-wing candidate from the Workers’ Party, in a second round later this month.

Bolsonaro has said that he is open to foreign investment, privatizing state companies, and creating more competition in oil and gas markets. He would likely push onward with the Petrobras divestment plan that was started under the current center-right president, Michel Temer. As part of that plan, which was designed to reduce Petrobras’s enormous debt, the company has sold off assets in refining, logistics, and transport to focus on its more profitable core business of oil exploration and production. Continued privatization is worthwhile, but beyond his support for it, Bolsonaro has been widely criticized for lacking any specific energy plan or even a detailed economic agenda.

Haddad, meanwhile, is fairly clear in his support for a return to the resource nationalism favored by his fellow Workers’ Party member former President Luiz Inácio Lula da Silva. Following the 2007 discovery of vast deepwater oil reserves, Lula introduced reforms that increased the government’s stake in Petrobras and made the state company the exclusive operator of the new fields. Temer later signed a law that reversed Lula’s bill, creating more opportunities for private investment in the sector. Haddad has promised to reverse Temer’s reversal and recover the oil to benefit the people. He has also pledged to strengthen Petrobras and to support the development of local industries by increasing local content requirements in oil exploitation and production. In short, Haddad would likely look to slow Petrobras’s divestment to keep energy assets in the state company’s hands and reassert its role as a driver of economic development.

Once in office, the new leaders of Mexico and Brazil will inevitably face challenges to implementing many of their plans. It is unlikely that Brazil’s next president will have enough support in Congress to overturn Temer’s law, for example. Likewise, in Mexico, although the president has broad powers to roll back aspects of the energy reform, only a two-thirds congressional majority—which López Obrador is unlikely to secure—can undo a constitutional reform. And in both countries, the administrations would face major legal challenges if they tried to unilaterally change existing contracts with private energy companies.

And then there’s the budget to think of. New refineries cost billions of dollars, are highly susceptible to corruption, and ultimately won’t lower gasoline prices for consumers. Expanding large hydroelectric dams also takes money, and it presents tremendous social and environmental challenges. Forcing a state oil company to operate all exploration and production projects risks massive corporate debt and a credit rating downgrade—precisely what happened to Petrobras under Lula and his successor, Dilma Rousseff. Meanwhile, strict local content requirements that are not coupled with programs to modernize local suppliers merely slow the development of oil and gas reserves. Despite the discovery of the undersea reserves in 2007—one of the most significant oil finds in the world in years—Brazil’s oil production remained nearly flat for years.

State-led development of energy resources can be very successful. Witness Saudi Aramco, the state oil company that has made Saudi Arabia one of the largest oil producers in the world. But experience in Latin America suggests that giving state companies a monopoly over energy production tends to restrict the industry rather than boosting it. And beyond that, it is worth considering whether it is wise to continue depending on oil to float the economy at all. As many other countries around the world, from nearby Colombia to Saudi Arabia, debate whether the time has come to transition the economy away from dependence on fossil fuels, in Mexico and Brazil, debates over energy policy continue to focus on nationalization versus privatization.

Considering resource nationalism’s poor track record in actually benefiting most citizens, it is time for these countries to shift the focus of policy discussions toward addressing today’s more pressing problems.

Lisa Viscidi is the director of the Energy, Climate Change, and Extractive Industries Program at the Inter-American Dialogue.

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